Government Credit, a Double-Edged Sword: Evidence from the China Development Bank (Single-authored)

Journal of Finance, 2018, 73.1, 275-316

Award for Best Paper in Corporate Finance, SFS Cavalcade, 2015 (finalist)
Best Ph.D. Dissertation in Honor of Professor Stuart I. Greenbaum, 2014, Washington University in St. Louis (finalist)

Abstract: Using proprietary data from the China Development Bank (CDB), this paper examines the effects of government credit on firm activities. Tracing the effects of government credit across different levels of the supply chain, I find that CDB industrial loans to state-owned enterprises (SOEs) crowd out private firms in the same industry but crowd in private firms in downstream industries. On average, a $1 increase in CDB SOE loans leads to a $0.20 decrease in private firms' assets. Moreover, CDB infrastructure loans crowd in private firms. I use exogenous timing of municipal politicians' turnover as an instrument for CDB credit flows. 

In Brief: VoxChina

Subnational Debt of China: The Politics-Finance Nexus 

with Haoyu Gao (Remin University of China) and Dragon Tang (HKU)

Journal of Financial Economics, 2021, 141.3, 881-895

Presentation in 2018 SFS Cavalcade North America Conference, ABFER 2017, CICF 2017

Abstract: We provide direct evidence of selective default on government debt when creditors can be identified. Using unique loan-level data, we find that local governments in China choose to default on banks that have weaker political power, as those banks have little influence over local politicians’ career advancements. Politically powerful banks experience lower default rates in local government lending. However, when local politicians are highly ranked or connected to national leaders, their promotions are less dependent on loan performance, hence they engage less in selective default. Our findings reveal a politics-finance nexus, which explains why governments do not default more often.

In Brief: VoxChina


Combating the COVID-19 Pandemic: The Role of the SARS Imprint 

with Endong Yang (University of Macau) and Kunru Zou (Remin University of China)

Management Science, forthcoming (Data and Code For Replication)

Abstract: We provide evidence of delayed attention and inaction in response to COVID-19 in countries that did not experience SARS in 2003. Using cross-country data, we find that individuals in countries that had SARS infections in 2003 searched more intensively for COVID-19-related information on Google in late January 2020, the time of the first known outbreak in Wuhan, China. Early attention to the novel virus, as measured by Google searches, is associated with deeper stock market drops in countries with SARS experience. In contrast, people in countries without SARS experience started to pay more attention much later, in March. Moreover, governments in these countries responded significantly more slowly in implementing social distancing policies to combat domestic COVID-19 outbreaks than governments in countries with SARS experience. Moreover, such early responses of individuals and governments in countries with SARS experience are prevalent within continent, even in non-Asian countries. Furthermore, people in countries with SARS experience are more compliant with social distancing rules. These timely attention and proactive responses of individuals and governments are more pronounced in countries that reported deaths caused by SARS, which left deeper imprints. Our findings suggest that the imprint of similar viruses’ experience is a fundamental mechanism underlying timely responses to COVID-19.

In Brief: Informs Resoundingly Human


The Informational Role of Ownership Networks in Bank Lending 

with Haoyu Gao (Remin University of China) and Xiaoguang Yang (CAS)

Journal of Financial and Quantitative Analysis, forthcoming

Presentation in CICF 2019

Abstract: This paper documents novel large-sample evidence on the informational role of interfirm ownership networks in bank lending. Using comprehensive loan-level data in China, we find that banks’ internal loan ratings at issuance predict subsequent delinquent events more accurately when borrowers are connected to banks’ existing customers via ownership networks. In post-issuance monitoring for delinquent loans, banks with access to ownership networks manage to downgrade their initial ratings before late payments. These findings suggest that ownership networks help the transmission of private information for bank lending. Moreover, ownership networks are more important for transmitting information related to small and medium enterprises.

In Brief: VoxChina


Government Credit and International Trade 

with Ning Cai (CDB), Jinlu Feng (CDB), Yong Liu (CDB), and Endong Yang (University of Macau)

Presentation in SFS Cavalcade North America 2019, ABFER 2019, AEA 2020

Abstract: Using transaction-level trade data from China Customs and loan data from the China Development Bank (CDB), we analyze how government-subsidized credit affects trade activities. We find that CDB credit to strategic industries at the top of the supply chain leads to lower prices, higher volumes, and more product varieties and destinations of exports for firms in downstream industries. Overall, the increased export amount caused by CDB loans is estimated to account for 1.14% of China’s GDP. We further document two essential mechanisms underlying such CDB credit positive spillovers across the supply chain. First, CDB loans to upstream industries significantly lower the prices of intermediate goods sold by upstream firms, which, in turn, reduces downstream firms’ costs of goods. Second, CDB loans to upstream industries increase accounts receivable of upstream firms and accounts payable of downstream firms. To identify these positive spillover effects, we use predetermined local politician turnover cycles as instrumental variables to exploit exogenous variations of CDB credit. We find that local politicians borrow significantly more from the CDB to fund local focal industries in the early years of their 5-year terms. The turnover cycles are not associated with other local government activities, such as land sales, subsidies, fiscal transfer, tax policies, foreign investments, and loans from other banks.


How do Individual Politicians Affect Privatization: Evidence from China 

with Kunru Zou (Remin University of China)

Review of Finance, Revise and Resubmit

Presentation in AFA 2020, SFS Cavalcade Asia-Pacific 2019

Abstract: This paper investigates how politicians’ patronage connections affect privatizations in China. The connections to top political leaders (i.e., Central Committee of the Communist Party of China) make local politicians engage more in rent-seeking by selling state-owned enterprises (SOEs) at substantial discounts. These connected local politicians are also more protected in anti-corruption investigations, thus extracting more rents by selling SOE assets at substantial discounts. Consequently, the privatizations conducted by the local politicians with patronage connections achieve significantly lower gains in efficiency and performance. To identify the role of patronage connection in privatization, we use the mandatory retirement age cut-offs of Central Committee members in the regression discontinuity design. We find drops in price discounts of privatization deals and jumps in efficiency for privatized SOEs when local politicians lose connections to Central Committee members around the retirement age cut-offs.


Government Control, Top Management Team's Pay Dispersion and Firm Performance 

with Wei Jiang (Remin University of China), Bin Ke (NUS), and Yue Xu (Sun Yat-sen University)

Management Science, Reject and Resubmit

Presentation in AAA 2019

Abstract: We examine how government ownership control affects the top management team’s (TMT) pay dispersion and how such TMT pay dispersion affects subsequent firm performance. We test three competing views on the influences of government control, referred to as the agency view, the equity view, and the social-political view. Consistent with both the equity view and social-political view, the TMT pay dispersion is lower for SOEs than for non-SOEs. Consistent with the social-political view, the lower TMT pay dispersion induced by government control reduces firm performance. We also decompose the total TMT pay dispersion into the vertical pay dispersion between the CEO and other TMT members and the horizontal pay dispersion among the non-CEO TMT members. Both the vertical and horizontal TMT pay dispersions are important in explaining our results. Overall, our results suggest that SOEs’ TMT pay dispersion is not designed to maximize shareholder value, supporting the social-political view.


Do Credit Card Companies Screen for Behavioral Biases?  

with Antoinette Schoar (MIT)

NBER Working Paper No. 22360

Presentation in 2016 AFA meetings, NBER 2016, ABFER 2017

Abstract: We analyze the supply side of credit card markets, and the pricing and marketing strategies of issuers. First, card issuers target less-educated customers with more steeply back-loaded and hidden fees (e.g. higher late and over-limit fees). Second, issuers use rewards programs to screen for unobservable borrower types. Finally, we use increases in state-level unemployment insurance (UI) as positive shocks to creditworthiness and show that issuers rely more on back-loaded (hidden) fees when UI increases, especially for less-educated customers. This result documents a novel trade-off: card issuers weigh short-term fee maximization against increases in credit risk, when using back-loaded fees. 

In Brief: NBER, WSJ, WashingtonPost


Rise of Bank Competition: Evidence from Banking Deregulation in China  

with Haoyu Gao (Remin University of China), Robert M. Townsend (MIT), and Xiaoguang Yang (CAS)

NBER Working Paper No. 25795

Award for Outstanding Paper in 12th International Conference on Asia-Pacific Financial Markets, 2017​

Award for Best Paper in the 2nd New Institutional Accounting Conference, 2018

Presentation in NBER 2017, CICF 2017, AFA 2018 , ABFER 2018, EFA 2018

Abstract: Using proprietary individual level loan data and population bankbranch data,this paper documents the economicconsequences of the 2009 bank entry deregulation in China. We find that the deregulationleads to higher screening standards, lower interest rates, and lower delinquency rates of the loans from the new entrant banks. The incumbent state-owned banks do not respond much to the deregulation. Consequently,for the firms with bank credit access, the deregulationleads to increases in asset investment, employment, net income, and ROA in deregulated cities. These positive effects on loan terms and firm activities are more pronounced for private firms than state-owned enterprises (SOEs).In contrast, the deregulation amplifies bank credit from productive private firms to inefficient SOEs due mainly to SOEs’ soft budget constraint. This unintended adverseeffect accounts for 0.31% annual GDP loss. 

In Brief: ABFER, VoxChina


Force behind Anti-Corruption: Evidence from China 

with JingRong Goh (NTU) and Kunru Zou (Remin University of China)

Presentation in MPSA 2019, APSA 2019

Abstract: This paper investigates the economic and political determinants of the recent anti-corruption campaign in China. We find that the targets of anti-corruption investigations and the timing are strategically chosen. Politicians’ personal demographics (e.g., age, ethnic, birthplace), economic performance, and political capitals play a role in investigation implementations. The connection to highly ranked politicians (i.e., members of the Central Committee of the Communist Party of China (CPC)) gives local politicians more political capitals which makes them less likely to be investigated and receive lighter sentences in investigations. We employ the regression discontinuity design by using the mandatory retirement age cut-offs of Central Committee members as exogenous shocks to their connected local politicians’ political capitals.


Enhanced Informal Network: Costly State Verification and Village Fund Intervention 

with Robert M. Townsend (MIT)

Abstract: Using data for over 600 households in 16 villages from Townsend Thai project, we find that the role of preexisting informal kinship networks in Thailand was enhanced following a quasi-formal village fund program in 2001. Transfers (gifts) among poor households play a crucial role in funding investment. This transfer mechanism and its role in investment were amplified for the poor households after the village fund, especially those with kinship ties. Moreover, we document a financial regime shift using maximum-likelihood estimation. Two exogenously incomplete regimes (saving only and lending/borrowing) dominated in the full sample and for the relatively poor before the village fund, but costly state verification, a less incomplete financial regime, dominates in the subsample of poor households following the village fund. The structurally-estimated cost of verification of the households with kinship is also significantly lower than the one without kinship after 2001, relative to before, suggesting the role of kinship was enhanced.